Enterprise Angels has announced plans for its third investment fund, EA3. The new fund will initially target $2 million, but there is provision to potentially issue up to $6 million if the demand is there.
Executive director Bill Murphy says the key difference in going to market this time is the investor group’s greatly increased knowledge base on the early stage investing market for New Zealand companies.
Since launching in 2008, EA has facilitated the investment of almost $40 million in nearly 80 early stage and established businesses across a variety of industries and launched two earlier funds, which are now fully invested, aside from follow-on commitments to existing investees.
Early stage angel investing is generally accepted as being a high risk proposition: investing through a fund structure that holds 20 or so companies helps to spread that risk, says EA.
“The really big difference from our earlier funds is that we now have much more data about the actual and potential risks and returns for a New Zealand early stage company,” said Murphy.
Murphy noted that much of the early stage investing data available for US and European early stage companies reflected the fact that these companies were usually already in their target markets.
“But almost every company we invest in, is invariably not in its market and either has to go offshore physically, or its market focus has to be offshore,” he said.
“Initially we didn’t know how much risk and how much cost were involved in that process. We have been finding out what the costs and risks are of building that bridge from New Zealand into markets where we don’t have the external capital relationships that a lot of the US startups already have. That’s an area of real interest to New Zealand investors and we’re starting to have a much better understanding of going that route.”
EA GP Limited chairman Neil Craig remarks in the EA3 Fund offering memorandum that investing in early stage companies is high risk and potentially high reward.
“A key way of mitigating risk is to invest in companies that have been through a rigorous due diligence and negotiation process backed by experienced early stage company investors,” he says.
“The other major way to mitigate risk is to invest in a portfolio of early stage companies.”
Craig cites the 2016 Wiltbank Study, one of the largest studies on angel investment in North America, which showed the overall cash-on-cash multiple was estimated at 2.5x capital and the holding period was approximately 4.5 years with a gross IRR of 22 percent.
An earlier study indicated that if an investor invested in six investments, they had a 50 percent chance of return of capital (1x). With 12 investments this increased to 75 percent probability of 2.6x return and with 48 investments there was a 95 percent probability of a 2.6x return.
To date the EA Portfolio has had 18 exits out of 71 companies – eight failures and 10 positive exits. And these include companies such as Engender, which provided a 5.2 times return over five years to Enterprise Angel investors, and SwipedOn, which provided a 2.4 times return over a 12 month period (see accompanying story).
The EA3 Fund memorandum notes that the formal angel industry and its statistics only began in 2006. A key message from the data and the experience of investors in New Zealand and overseas is that successful angel investors needed to build a portfolio of quality early stage company investments – a minimum of 10, says EA.
EA3 is targeting a diversified portfolio of indicatively 20-plus companies.
“Given that the typical angel investor in New Zealand invests between $10,000 and $50,000 in each startup, the only way to invest in so many companies for all but the most active and wealthy angel investors, is to invest via a fund,” the memorandum says.
“The primary purpose of the EA Funds is to enable investors to achieve this goal.”
Murphy said the EA was now in a position to invest in startups based on real information from the experience of New Zealand startups. He acknowledged that this would not make early stage investing risk-free.
“However, interestingly the statistics that we’re starting to see are that in the US angels will lose all their money on seven out of 10 of their investments, but of those three where they make their money, one of those will be a 20 x or 30 x return,” he said.
“We are not seeing the same failure rate with NZ startups – but we are also not generally seeing those same big returns.”
Longtime EA board member and investor Beppe Holm said the latest fund reflected the ongoing maturing of the angel investment space and EA in particular.
“With Funds 1 and 2 largely committed, this is really the next step for both existing and new members. Enterprise Angels now has more members coming on all the time.”
The investment group, which takes in both the Bay of Plenty and more recently Waikato, added around 60 high net worth individuals over the past year and now has around 210 members.
“A bigger fund means in essence that it can invest in and provide better opportunities for the investors who may be in there with a relatively small amount of money, but can spread that money over a larger number of companies.”
Holm echoed Murphy’s view that EA now had a much more realistic understanding of what might be achievable.
“And while we all hope that one of our investees might turn into the magical unicorn and deliver phenomenal multiples on what you put in, I think history so far has proven we are getting slightly less grand returns – but nonetheless good returns,” she said.
“Early stage is still a risky space. The beauty of the fund is that you can play in this space without investing a large sum of money in any one investment. You have the opportunity of have the opportunity of your investment being spread across many more investments than if it was invested in those companies independently.”
Key sectors of interest
The Fund will focus on the following investment sectors, namely high growth potential companies innovating in: Agtech, Technology, Hardware & Equipment , Software & Services, Food & Beverage, and Medical-Human.
Enterprise Angels and its funds have played a key role in developing innovation and business in the Bay of Plenty.
Jennifer Boggiss, co-founder and chief executive of Te Puna-based Heilala Vanila, which has recently raised capital to acquire access to more land in Tonga as part of its longer-term strategy of building an integrated vanilla supply company, said that EA support had been key.
Boggiss said having local EA support and long term investors in Heilala Vanila had really resonated with a new lead investor who has come into the company.
“A lot of the EA investors have experience in horticulture, so they understand the importance and the value of having an integrated supply chain business model,” she said.
“I think it really helped our capital raise pitch that we had local EA investors who had been in for eight years and had reinvested.”
Swiped on success
Tauranga-based software-as-a-service company SwipedOn closed a successful cap raise of $1 million in January 2018, with EA investors taking a significant stake.
The start up’s innovative worksite visitor management solution was acquired by UK AIM-listed SmartSpace Software Plc less than year later for $11 million in cash and SmartSpace shares.
Co-founder Hadleigh Ford described the deal as a great success story for Tauranga and the New Zealand tech sector.
“I see this acquisition as an extremely positive thing for the Bay of Plenty, especially the burgeoning tech scene here,” said Ford.
“We were really proud to have the support of the local angel network. We managed to realize a return for our investors that was extremely good.”